Are Alternate Currencies Like Bitcoin Viable Without Government Backing?

[Jim Kata]

I recently heard about bitcoin, but don't know that much about it. I read the Wikipedia article, but it wasn't particularly enlightening. What are the prospects of an alternate currency, like bitcoin, being viable. My guess is probably not much since it lacks the coercive power of a government. The concept of alternate currencies is extremely fascinating to me because it shows that the value of money is only in the eye of the beholder.

 

[encorp]

Bitcoin is illegal.

You use a computer to generate the coins, for a person getting into it now it's pretty hard to make any real coin unless you're trading goods for it.

Currently it's mostly only used by people sourcing illegal supplies and material from places like: http://en.wikipedia.org/wiki/Silk_Road_(marketplace))

It's also highly used in the human exploitation world and on the under-net of TOR networks. http://en.wikipedia.org/wiki/Tor_(anonymity_network))

I think the prospects of an alternate currency gaining any ground are VERY slim - though in the black market world it could take over to a certain extent since it offers anonymity and can't be controlled via the current global market powers.

 

[aroc91]

Bitcoin is illegal.

No, it's not.

 

[0xDEADBEEF]

There are a great number of problems with Bitcoin. Which are thoroughly understood by macroeconomics, especially deflation and inflation.

The current Bitcoins have the drawback, that they stop being produced at some point. When more people enter the Bitcoin market this leads to increasing prices which leads to hoarding, which leads to price increases. This is what happens with gold. Most gold is sitting in the central banks vaults for the sole purpose of hoarding. Nobody uses it for purchasing. And on a side note I don't see why I should make the few people rich who started minting early. But that is a moral point not a technical one. The Bitcoin people produce a lot of hogwash, that deflation is only bad when you are not prepared for it and some similar nonsense, but deflation will kill Bitcoins.

The second problem is that Bitcoins are not very unique. Once the Bitcoin currency takes off, nothing prevents other people from opening their own Bitcoin copy, possibly connecting it to their own legal or illegal markets. I can already see all the great new currencies in my mind Flipcoin, Bitcash, Cryptocoin... you can have them with inflation, without inflation, self destroying. Maybe someone even convinces the people to change their Bitcoin client program, if you control the majority of the clients then you could even mint Bitcoins anew.

 

[Czcibor]

There are quite a few alternative "currencies" that lacks backing by government, while seem to work:

Somalian shilling that exists long after collapse of its country
http://www.economist.com/node/21551492
(used for small transactions or in big bundles, its value is low enough to make forgery not specially profitable business)

Transfers between phones in Africa is also not dramatically far from effectively becoming a currency on it's own, and I've seen an idea to calculate that money also within money aggregates.

 

[ModusPwnd]

Bitcoin has many strengths. Its peer to peer with no central oversight needed or wanted. The prospects of it being viable are 100% because it already is viable. The black market supports it and that isn't going anywhere anytime soon.

Of course there are caveats to it as well. Its new and there for risky. If it gets popular its going to be under attack from banks and governments for the freedom it allows.

Even if/when bitcoin goes under, cryptographic electronic currencies are not going anywhere. Not as long as there is still an internet. I would not be surprised if in a few hundred years peer-to-peer cryptocurrencies are an important part of the global economy.

 

[alan2]

It's not even currency, it's simply a medium of barter. You could just as well buy rocks and then trade them. Without a banking system, the supply can grow only by producing and selling more. You can't loan them, they don't provide economic growth.

 

[ModusPwnd]

It's not even currency, it's simply a medium of barter.

Whats the difference?

 

[alan2]

Whats the difference?

Fractional banking. That's where money comes from.

 

[ModusPwnd]

There was currency long before there was fractional banking though. I have never heard of fractional banks being a necessary requirement for something to be "currency".

Currency is a medium of barter. It has nothing to do with whether your bank holds fractional reserves.

 

[alan2]

There was currency long before there was fractional banking though. I have never heard of fractional banks being a necessary requirement for something to be "currency".

Currency is a medium of barter. It has nothing to do with whether your bank holds fractional reserves.

The term currency is generally used today to mean a system of money. Real money is more than just a medium of barter. Bitcoin is exactly the same as buying a pre-paid debit card and using it for transactions. You buy the bitcoin, use it to purchase something, then the seller trades the bitcoin for money. There are a lot of people who think that somehow they can create an alternative currency and it will compete with centrally issued currency and somehow be better, or somehow be an alternative to real money. It's not true. If you understand that it is just a medium of barter and must eventually be sold for money then it's fine. Unfortunately, there are a lot of people who think that it's more than that.

 

[ModusPwnd]

Real money is more than just a medium of barter.

I don't think it is. I don't know why you feel the need to qualify it as "real", but money issued by governments is a medium of barter. Nobody eats money or burns it for fuel. Its temporary means of exchanging "real" wealth and value like labor, equities and resources.

There are a lot of people who think that somehow they can create an alternative currency and it will compete with centrally issued currency and somehow be better, or somehow be an alternative to real money. It's not true.

It is true because it has already happened. You may not like the niche role it plays and the service that the alternative currency facilitates. Many people dont. But that is a judgement call based on your own personal values. The fact remains that bitcoin as an alternative currency does exist, it does compete with centrally issued currency and for the niche role it plays in the black market it is a better alternative than "real" money.

 

[Tosh5457]

The term currency is generally used today to mean a system of money. Real money is more than just a medium of barter. Bitcoin is exactly the same as buying a pre-paid debit card and using it for transactions. You buy the bitcoin, use it to purchase something, then the seller trades the bitcoin for money. There are a lot of people who think that somehow they can create an alternative currency and it will compete with centrally issued currency and somehow be better, or somehow be an alternative to real money. It's not true. If you understand that it is just a medium of barter and must eventually be sold for money then it's fine. Unfortunately, there are a lot of people who think that it's more than that.

Look at the definition of money from wikipedia:

Money is any object or record that is generally accepted as payment for goods and services and repayment of debts in a given socio-economic context or country.[1][2][3] The main functions of money are distinguished as: a medium of exchange; a unit of account; a store of value; and, occasionally in the past, a standard of deferred payment.[4][5] Any kind of object or secure verifiable record that fulfills these functions can be considered money.

Bitcoins are a object that is accepted as payment for goods and services and have all those functions.

 

[Jim Kata]

I don't understand what Alan means by "real" money. Money is a made up concept it is only as real as the people who use it agree that it is. If you only have two people using a currency, it's not real, but if you can get a billion people to use it is definitely real. How real or fake a currency is really only depends on how many people agree to use it.

 

[Ryan_m_b]

There was currency long before there was fractional banking though. I have never heard of fractional banks being a necessary requirement for something to be "currency".

Currency is a medium of barter. It has nothing to do with whether your bank holds fractional reserves.

Agreed, fractional reserve banking is a relatively recent invention. It's not easy to find a specific date on when it started but it certainly didn't become coming til after the middle of the last millennium. FRB might be where our money comes from today but its definitely not the n,y source of currency.

 

[rollingstein]

Wasn't segniorage a form of fractional reserve banking?

 

[Ryan_m_b]

Wasn't segniorage a form of fractional reserve banking?

What makes you say that?

 

[Jim Kata]

There are a great number of problems with Bitcoin. Which are thoroughly understood by macroeconomics, especially deflation and inflation.

The current Bitcoins have the drawback, that they stop being produced at some point. When more people enter the Bitcoin market this leads to increasing prices which leads to hoarding,

I have heard the hoarding critique of alternate currencies a few times. My question is why are alternate currencies any different than standard ones in that what is the incentive to prevent hoarding in conventional currencies?

 

[russ_watters]

Most currencies have a variable supply and are kept inflationary instead of deflationary. That's one of the main reasons for getting off the Gold Standard.

 

[AlephZero]

Standard currencies usually have a central bank which can unilaterally create or destroy money with the object of maintaining stability relative to other currencies. (Of course this doesn't always work - e.g. in Zimbabwe). Therefore "hoarding money" is unlikely to create any profit in the long term, and since as russ said currencies are usually mildly inflationary, it is most likely to create a loss relative to the cost of goods and services.

There doesn't seem to be anything equivalent to a central bank backed up with legal powers for bitcoins, and therefore they would seem to be more like a traded commodity (gold, oil, soya beans, whatever) than a standard currency.

In fact they are far more volatile than most commodities. Within the last week, the price has moved from $90 to $142, and today dropped back to $120 following a hacking attack on the largest bitcoin trading site.

Asset managers have noticed it. One market strategist has described it as "gold for computer nerds". A fund management company based in Malta started a bitcoin fund last year "for fun", but claims they are now getting "20 phone calls a day" from asset managers looking to invest "up to $100m". The banking crisis in Cyprus has sent some people looking for new places to keep their wealth, of course.

(Sources for last 2 paragraphs: front-page article in Financial Times newspaper, 4 April, and BBC news website)

 

[Greg Bernhardt]

Bitcoin has been slowly chugging away. I don't have much interest in using it, but it's quite a phenomenon.

Digital 'bitcoin' currency surpasses 20 national currencies in value
Read more: http://www.foxnews.com/tech/2013/03...0-national-currencies-in-value/#ixzz2Ps9iwGbx

 

[phyzguy]

To me, bitcoins seem to be experiencing a classic bubble. The worth of a single bitcoin has increased more than 10X in the last 6 months or so. I'd say it is just a matter of time before the bubble bursts.

 

[russ_watters]

Yeah, I think they are digital Beanie Babies.

 

[nitsuj]

Yeah, I think they are digital Beanie Babies.

 

[Blenton]

Well it popped.

 

[0xDEADBEEF]

A few more notes. I don't know exact numbers, but people from the beginning of bitcoin are surely hoarding a vast amount of bitcoins. They are like the central bank. If they decide to cash out, the currency collapses (maybe just temporarily). I don't like the idea of a random 19 year old controlling the value of my savings. Furthermore there seems to be a multi gigabyte transaction log already. It seems that everyone logs the whereabouts of all the coins, right now the market is small, but if it should become big, we'd have Terrabytes of logs sitting on each computer just to be able to do finance. Maybe my technical understanding is not correct, then someone can correct me, but it doesn't seem like Bitcoins can really scale to a global level.

 

[phyzguy]

Here is an interesting take on bitcoins from Paul Krugman, Nobel prize-winning economist.

 

[Greg Bernhardt]

Virtual Bitcoin Mining Is a Real-World Environmental Disaster

Blockchain.info, a site that tracks data on Bitcoin mining, estimates that in just the last 24 hours, miners used about $147,000 of electricity just to run their hardware, assuming an average price of 15 cents per kilowatt hour (a little higher than the U.S. average, lower than some high cost areas like California). That, of course, is in addition to the money devoted to buying and building the mining rigs. The site estimates the profits from the day of mining at about $681,000, based on the current value of Bitcoins. So mining, at least for the moment, is a lucrative business.

The trade-off here is that as virtual value is created, real-world value is used up. About 982 megawatt hours a day, to be exact. That’s enough to power roughly 31,000 U.S. homes, or about half a Large Hadron Collider. If the dreams of Bitcoin proponents are realized, and the currency is adopted for widespread commerce, the power demands of bitcoin mines would rise dramatically.

http://www.bloomberg.com/news/2013-...g-is-a-real-world-environmental-disaster.html

 

[Evo]

Continued here https://www.physicsforums.com/showthread.php?t=685768&page=4